1. Welcome. Thank you very much indeed for coming
along to see us and also thank you for your written evidence in
response to our report last year. We are delighted to see you.
Perhaps you would like to introduce your colleagues and if there
is anything you would like to say by way of introductory statement,
as long as it is brief, we should be delighted to hear it.

(Mr Fletcher) On my left is Mike Saunders,
who is Director of Consumer Affairs. On my right, Dr Bill Emery,
Director of Costs and Performance and Chief Engineer at Ofwat.
Knowing how much committees do not like long introductory statements,
if I may I should just like to say a few words, but please cut
me off the moment I start boring the Committee. I am just over
six months into the job. I thought I was coming just at the end
of one Periodic Review and with five years to go until the next.
I find I am subject to the Chinese curse: I live in interesting
times. Two major takeover/mergers, a lot of restructuring thoughts,
the most obvious of which is the Glas proposition in relation
to Welsh Water, proposals for a Water Bill, excessive rainfall
and a host of other things, all of which has meant I have had
to get into the job very fast. I am also very conscious of my
parliamentary accountability. This is my third appearance before
a committee in the last four weeks or so. What I found on arriving,
eleven years after my last full acquaintanceship with the water
industry was an industry which has significant achievements to
its name, in my view, achievements measured in terms of outputs:
The quality of drinking water, squeezing up from 99 per cent to
99.8 per cent, real improvements in river and bathing water quality,
sewage treatment works compliance, leakage down from over 30 per
cent five years ago to 21 per cent now, low pressure significantly
reduced, a very big quality programme, bills up admittedly 24
per cent in real terms but with a 12 per cent money reduction
in the year just ending. I reckon that gives me quite a big job
to get into as the regulator. I am conscious that it is not my
job to manage the industry. I am conscious that the whole definition
of the job is not one which can ever lead to a cosy relationship
with the various stakeholders. In companies it is in shareholders'
interests to maximise agreed programmes of improvement, which
flow through into turnover, flow through into profit. Quality
regulators are naturally seeking higher standards. Ofwat's job,
not demonising the environment, is nonetheless in my view to seek
on behalf of customers to ensure that companies can finance their
functions and that the bills are no higher than they have to be.
I welcome very much the conclusion in the Committee's report that
the last review represented a clear forward programme with sufficient
consultation. I aim to maintain that and, if I can, to improve
it. I have been listening and learning over my six months, visiting
the water companies, going to the other stakeholders. Our consultation
on the Ofwat forward programme for the coming year, but starting
to stretch towards the next Periodic Review, is one earnest of
our intention to be a listening as well as a doing organisation.
I want to be flexible and as one earnest of that I said in my
response to the Committee's recommendation about a sustainable
development duty for the regulator that I had my doubts. I wondered
whether it would confuse the overall functions that I have. I
have gone on reflecting about it. It would make sense, if and
when there is a Water Bill, for there to be a sustainable development
duty for the water regulator. I would envisage it in the sorts
of terms which have been used for the regional development agencies
and others, that is to contribute to the achievement of sustainable
development where it is relevant to do so. Our draft forward programme
makes reference to sustainable development as part of what we
are about. I accept not least points from the Committee but points
which have come from other places as well that there is more for
Ofwat to do in getting ready for the next review. You asked that
I look at the release of the financial model. We are developing
a new financial model at the moment to get us ready for the next
review. We are looking to do so in a way that will facilitate
sharing that model with the industry. All told, we are looking
to work with the industry, the regulators, Environment Agency,
Drinking Water Inspectorate, within the framework set by statute
and by Government in terms of the quality programme. We are looking
to make it an open and transparent and objective affair, a consistent
process, and I hope that my answers this afternoon will bear that
out.

Mr Chaytor

2. Thank you for that insight into your approach
to the role of regulator. May I ask you specifically what you
think your highest priorities are over the next few years?
(Mr Fletcher) In the Ofwat forward programme we set
out for the first time our aims and objectives. There is a danger
of doing it in management-speak, but there is some merit in using
the vision mission and then how-we-set-about-it discipline. We
set for our vision a water industry which delivers a world class
service representing best value to customers now and in the future.
That is one of my points that it is not Ofwat, it is not the regulators
which deliver a world class service, it is the industry. Therefore
Ofwat's role within that, our mission, is to regulate in a way
which provides incentives and encourages the water companies to
achieve those services, provides quality, which of course includes
environmental quality and value for customers in England and Wales.
Then we go into a series of specific points. In terms of specific
work priorities, working towards the next Periodic Review is obviously
an important one. We must not try to jump into that Periodic Review
ahead of time. Our own review after the last one suggested that
we might have blown the trumpet just a bit early and had people
chasing round the circuit just a few too many times. So somehow
we have to blow the trumpet at the right point, but there are
specific things we ought to be getting on with now. The Committee
made much, for example, of capital maintenance work: that it is
for the companies initially to ensure that their assets are in
the right condition, but we accept that it is Ofwat's job also
to provide a right framework, a right context, a transparent approach
to capital maintenance issues. I could pick out various other
things we are specifically looking to do in the next few months
and years as work in hand, work on leakage, work on bad debts,
which is an issue particularly following the decision that disconnections
should no longer be allowed in the water industry, and a number
of other specifics.

3. May I ask a very direct question and that
is about the role of the regulatory office itself? There was some
criticism through our previous enquiry about the very system of
having individual regulators and whether the personality of the
individual got in the way of the regulatory process. I am not
suggesting that six months into the job you are going to argue
that the office should be abolished, but do you have any observations
on this and this question of the role of the personality or the
way in which the personality impinges on the process, the question
of whether the five-yearly review becomes a bit of a game whereby
the companies try to beat the regulator? What are your thoughts
on those criticisms?
(Mr Fletcher) To start with the individual regulator,
clearly there are dangers. For example, the press rather enjoys
the "Fletcher does this" or "Fletcher gets slammed
by that committee" or whatever. It is terribly important,
if we persist with an individual regulator, that that individual
regulator should not exactly take his personality out of it, that
is impossible, but should ensure that there is a clear approach,
an understood approach, transparent, reasonably predictable. As
you will know, one of the concerns that those who invest in the
water industry or lend to it have is about regulatory uncertainty,
a concept which tends to embrace not just me but my fellow quality
regulators and, from time to time, the Government. It is certainly
something I have to seek to minimise. That does not mean I will
not seek to ensure that the companies are compelled to go on delivering
those efficiency gains, that customers are given a good deal,
that the environment is properly served through the actions of
the water companies. It does mean I have to be clear about how
we are doing it and why. Why not move to a board as, through the
Utilities Act, has happened for gas and electricity? There are
advantages in a single regulator, bearing in mind that I have
to relate to two regulator colleagues, Drinking Water and the
Environment Agency, in a way that in the other sectors is not
directly relevant. The Government have proposed in their Water
Bill that there should be a little bit of a hybrid, a hybrid about
which I have some doubts, and this is the Water Advisory Panel.
If you wanted me to get into that it would make my answer a bit
longer, but I could explain why I have some doubts around that.

Mr Chaytor: One of my colleagues will
be asking about the Water Advisory Panel a little later.

Chairman

4. You mentioned in your answer a study you
had undertaken of the last review.
(Mr Fletcher) Yes.

5. Is that a public document?
(Mr Fletcher) It is indeed. It was a managing director
letter which came out on virtually the last day of Ian Byatt's
tenure of his office.

6. So that is available publicly.
(Mr Fletcher) Indeed it is. We shall make sure the
Committee has it. [1]

Joan Walley

7. I am glad that you are before this Committee
as well as the other Select Committees you have been before in
the last few weeks. I was very interested in the comments you
made just now about perhaps having had second thoughts about the
prospects of a duty on sustainable development in respect of the
forthcoming Water Bill. We do know that the Environment Minister,
Mr Meacher, who incidentally is a member of this Committee, has
already set out that he is sympathetic towards having a sustainable
development duty. Given what you said just now in your introductory
comments, we should like to think that as a committee perhaps
our report to which you have responded might have been contributing
to this.
(Mr Fletcher) It was.

8. So we are very glad that we are part of policy
formulation. I should just like you to comment a bit more. You
said you would welcome it where appropriate. I should be very
interested if you could just flesh out your comments a little
bit more as to what you mean by "where appropriate"
and where it might not be appropriate.
(Mr Fletcher) I was actually quoting from the statute
which set up the regional development agencies. That is actually
in the Act. It is normally going to be appropriate. May I just
quote the context in which I have put it in our draftit
is still draftforward programme? It is to work with the
quality regulators to ensure that the quality of drinking water
and waste water is improved at an affordable rate to the benefit
of customers and the wider environment and that the abstraction
and use of water takes account of the need for sustainable development.
The more I went looking back into sustainable development, the
more it was borne in on me that of course this is not just an
environmental term, it is a term which embraces social progress,
which recognises the needs of everyone, effective protection of
the environment of course, prudent use of natural resources, maintenance
of high and stable levels of economic growth and employment. What
economic regulator could possibly object to having those elements
firmly set out within his or her statutory remit?

9. Would you for example see that as including
the use of the precautionary principle? I know one of my colleagues
wants to ask questions later on about standards of serviceability
but I am thinking particularly about perhaps the leakage from
sewers, how we could perhaps be preventing that through the whole
programme, through the reviews and so on, how that duty could
be at the very foundation of what then gets proposed in future
reviews. How would you see that?
(Mr Fletcher) The precautionary principle is obviously
important and I am familiar with it from my past time at the Department
of the Environment. Bearing in mind the Committee's criticisms
of the Ofwat approach to capital maintenance, where I do not altogether
accept the Committee's criticisms and would hope to demonstrate
in the course of this hearing that we do not neglect it intellectually,
there is a very interesting dilemma there. If I may take as an
example the Committee's worry which says that Ofwat takes its
approach to capital maintenance as steadily walking backwards
with the danger of walking backwards off a cliff somewhere behind
us, that there could be a point at which there is a big step change
in the serviceability of our infrastructure. If that were the
case your criticism would be absolutely valid. We entirely accept
that there needs to be a forward looking approach but a forward
looking approach that builds on the past. The precautionary principle
does not in this case mean creating a great defensive margin which
would be appropriate if we were talking about the petro-chemical
industry for example, because of the catastrophic consequences
of something going wrong there. There is less catastrophe, if
we took your example of leakage, and I in no way minimise the
extreme discomfort that is caused to anybody who has their home
invaded by waste water, but it is a different order of magnitude
from an environmental catastrophe as may occur in some other sectors.

10. Just taking forward the whole principle
of a precautionary principle, presumably if you have constantly
leaking sewers which are perhaps not easily measured, with water
getting into the groundwater, that presumably would be a pollution
incident, not of the severity of a major oil disaster but nonetheless
something which should be perhaps taken into account when assessing
future programmes in respect of the precautionary principles.
Would you agree with that?
(Mr Fletcher) Most of the concern tends to be around
drinking water where we have water under pressure. Where we are
talking about sewage getting into the wrong places, it is often
about the capacity and then we get into issues about storm water
drains serving dual purposes.

11. Could you do a note on that and the detail
of that? [2]
It is not just about the capacity and the sewage overflows, it
is also about the constant drip, drip, drip leakage into the groundwater.
(Mr Fletcher) I do not think there is evidence that
sewage in itself is causing serious environmental damage.
(Dr Emery) I am not aware of any evidence from the
Environment Agency that they have identified this as a potential
problem, although quite a few of the sewerage renovation contractors
and interest groups point it out and there is a paucity of data
on the degree of leakage from sewers or infiltration or exfiltration
from sewers. Generally speaking the groundwater tends to go into
sewers.

12. Which brings me back to the point about
the precautionary principle, that if there is no data, perhaps
that is one of the things which needs to be addressed. I would
welcome some ongoing clarification on that. In terms of what Ofwat
has already done I should be interested to know to what extent
you have already taken up the Government's greening government
initiative, to have some idea of how you already plan for environmental
impacts of your operations in dealing with the precautionary principle.
(Mr Fletcher) In terms of the greening government
initiative we do look to do all the right things as a very small
government department. If anyone wants to ask me I shall happily
pick up our recycling of waste paper, our endeavours to save energy
and so on, our encouragement of cycling. On where we have the
impact, there it is a question of working with my quality colleagues.
It is very much an issue of working with and sometimes arguing
with our colleagues in the Environment Agency and in the Drinking
Water Inspectorate about the appropriate levels of investment,
quality standards to go for. In the end of course it is for the
Drinking Water Inspector to say what the quality standard is and
it is not for me to argue with him. It is for me to ensure that
he is aware fully, as the Government need to be aware, of the
costs which follow from it.

13. Is the Water Bill itself going to make your
job easier or more difficult? What are the good things about it
and what will you be busily drafting amendments to off the record
to try to get changed?
(Mr Fletcher) I am already on record in responding
to the Environment Sub-committee on the Bill. The difficulty at
the moment is that the Bill is only partial, as the Government
would accept. In particular it has a big hole labelled "competition"
and another big hole labelled "economic charges". Both
those holes need to be filled, I have suggested to the Government,
before we can really see an integrated Bill, for example which
enables us to take a rounded view of the abstraction regime proposed
in the Bill. I am not trying to demonise the abstraction regime
but it is basically at the moment a command and control type of
operation. If one is introducing the concepts of economic charges
and of the potential for competition, then that could affect the
long drafted, long considered, long consulted on abstraction regime.
Depending on when the Water Bill arrives, there are some very
interesting issues there to be worked through. Of other issues
which concern me, I am welcoming the establishment of a Consumer
Council for Water, even though I believe that the present arrangement
which is under the Ofwat umbrella does deliver a good service
to customers through my colleagues on the customer service committees.
I mentioned the Water Advisory Panel and will probably go on mentioning
it until someone actually asks me a question about it.

14. I am just about to. Do you see it as building
on the existing Regulatory Policy Committee (RPC)? Do you see
it as being a critical friend of yourself? How would you like
it to be set up?
(Mr Fletcher) I should like the critical friend. One
of the issues in the job is that it can be a lonely sort of job
and that is not to ask anyone to start crying for me. I have my
colleagues in Ofwat, I am able with them to kick ideas around,
entirely informally, to go completely off the wall and come up
with crazy things and then work them through and come up hopefully,
publicly, with something more sensible. It is very difficult for
a regulator to have that sort of conversation with almost anybody
else unless they are working within the tent. The Regulatory Policy
Committee, a formalisation of Ian Byatt's former business advisers,
is really that. It is bringing in people who are not conditioned
by the Ofwat culture, who have wide experience in other sectors,
to bear on the water sector, to tell us where we can learn insights
from elsewhere. If a Water Advisory Panel were that, fine, I would
really welcome that. However, the corollary of that would be if
you still have a single regulator who has the fundamental statutory
responsibility and accountability to Parliament andI hope
I am not being egotisticalI think I ought to chair it.
It ought to be within the umbrella of Ofwat and then of course
you can ensure that you have someone who has good customer skills,
someone who has good environmental skills, someone who has all
the business and City knowledge. That would not cut across the
need for me to take very close account of the formal links I have:
English Nature, the Environment Agency, the water companies themselves,
the customer services committees. If it is somebody up there,
the Water Advisory Panel, being a sort of second guesser regulator,
that would not help me very much and it could confuse, which would
be more worrying, including the point back to regulatory risk,
it could confuse those who invest: just who are these people,
how big is their influence, is it going to lead to a distortion
of the regulatory environment which needs to be clear and transparent
and reasonably predictable?

15. Your worst scenario would be to have something
which was almost set up in opposition to the way you see yourself.
(Mr Fletcher) There could be a danger. I would hope
very much it would not work out like that but at the moment the
Government have not said at all clearly how their Water Advisory
Panel is going to work. So I have exposed for you the sort of
twin tracks: the one I should very much like to see and would
absolutely welcome and one which would leave me with concerns.

Chairman

16. We have the RPC at the moment, which you
quite like.
(Mr Fletcher) Yes, I find it helpful. It brings me
insights enabling me to toss around ideas on, for example, competition
in water, which has only developed to a fairly limited extent
so far and where there are big issues about how fast and how far
it can develop. I can kick those ideas around entirely informally
and it does not create any waves.

17. Why are you worried about waves?
(Mr Fletcher) It is the unpredictability of regulation
and the need to set as clear and transparent an approach as possible,
which is why everything I say has to be said in a context where
it is likely to be reported. It is not easy to have off-the-record
conversations as an economic regulator.

18. This is the problem. Everything you say
is gone over with a microscope by the Financial Times or whoever
and therefore you simply have to wait and this is your problem.
(Mr Fletcher) That is right.

19. There is a danger in that, is there not,
that it all becomes rather incestuous and people go native and
you do not get real critical advice.
(Mr Fletcher) Always. This is not a criticism of the
stakeholders but all of them have their stake, their interest,
and they are putting forward a particular point of view. I am
not saying it is dishonest or that it is unbalanced. I am saying
everybody is coming with a particular line to take and that is
why the few you can talk to off the record, genuinely because
you are under common conditions of confidentiality, within Ofwat,
which is valuable, or, almost more valuable, outside so not conditioned
by Ofwat culture which inevitably develops over time, and enables
you to waive the Ofwat culture in an informal way.